Making sacrifices to pay off a mortgage
Who said that making the stipulated monthly payments is the only way to pay the mortgage? If you can save money every day to achieve your home ownership goals, you are more likely to clear your mortgage faster than you though. Let me give you the details of an effective plan that I used to repay my home loan.
When I moved into my new house in Ottawa last year, my mortgage balance stood at 33% of the total loan which I had taken in 2013. Staying debt-free has always been my goal since I can remember. And one thing you too should know is that when you pay your dues quicker, you will incur less interest and end up saving tens of thousands. I wanted to accelerate the payments and determine the total amount I would put on the home loan per month. I requested a different payment plan from my bank where I would increase the installments by 50%. So, I had to make a lot of sacrifices every week, both personal and financial.
I realized I was spending half of my income for personal use, 35% on my home loan, and the other 15% on miscellaneous needs. I had to cut out most of the miscellaneous expenses. Then, I scrutinized thoroughly my lifestyle to minimize any luxurious expenditure and surprisingly, I realized that 50% of my personal expenditure was pointless. Making weekly repayments became possible. When I finally started channeling money to the right places, the results were my home loan coming down and an increased net worth.
Looking at the numbers might seem fun, but to be honest, life wasn’t easy for me. I needed every dollar to count and so I had to check all the receipts from grocery shopping to electricity bills. It was more frustrating knowing that I had money to spend but had to direct it to the mortgage. One thing I’m so proud of is that I choose a house I could afford. That’s why I managed to clear the debt faster (in 5 years). As I narrate my story today, I am celebrating 3 months of waking up to a paid-off home. I can’t literally explain the feeling of knowing the roof over my head belongs to me only. And I’m not quite sure it has sunk in yet that I no longer worry about providing shelter for a family of four. Do I need to explain to you about my savings rate? It is hitting insane levels.
Think about this: how many times do you go for unnecessary eat outs and buy stuff you don’t actually need? That’s my point. If you are not putting cash for a specific goal it will disappear sooner than later. Luxury is fun but when money is gone, it never comes back. So, start saving today to build a home.
Calculating how long to pay off the mortgage
Did you know that the average mortgage loan term is about 25 years? Some lenders provide shorter terms but this implies higher monthly repayments. You can manage to pay out in 10 years but if you need more flexibility, the 25 years could be useful. So, how is the repayment period determined? Check out the factors that come into play.
- Total loan: how much money have you borrowed from your lender?
- Interest rate: your lender charges you a percentage of the loan for using their services. It is determined every day with regards to the outstanding mortgage. You can check your interest rate from the home page for the provider you are interested in.
- Repayments: refer to the installments you have to make to pay off your mortgage
- Repayment frequency: it is the regularity or the rate at which you make repayments. It could be monthly, weekly, or fortnightly
Tips to help you clear your mortgage quicker
As explained earlier on increasing repayment frequency as I did can save you interest and also cut down your principal. With accelerated payments, you will be making an equivalent of one extra monthly installment per year. You might not notice the difference but it saves you a lot of interest. It is a win-win situation. What else can you do?
- Repay more with unexpected funds: what do you do with tax refunds, dividends, workplace bonuses and unexpected profits? How about putting them to your mortgage? This will allow you to reduce the interest payable
- Increase repayments during low-interest periods: sometimes, the Bank of Canada directs commercial banks to reduce interest rates. Even during such economic seasons, maintain the same level of your repayments. You might be able to reduce the amortization period
- Use an offset account for your salary: if your savings can over for a percentage of the interest rate, you might be able to reduce the real burden of your mortgage
- Do a mortgage health check: you might think that your lender has the most competitive rates on the market only to be shocked after making comparisons. If it’s not worth staying, consider refinancing with your lender
To pay a home loan off quickly, think about adding more money toward your monthly installments. Talk to your lender if they can accept a lump-sum payment or an increased monthly prepayment. This will be their privilege. You don’t need to add tens of thousands; start increasing by smaller amounts every month. Make sure that the amount is recorded in the contract. Sometimes, a prepayment penalty is charged if you make more than what the contract says. Note that when you decide to increase the installments, there is no going back until the mortgage term ends.
But when can you make a lump-sum payment?
- When the term comes to an end
- Before the term ends
- On particular dates on the contract
- During particular times of the year
Make sure that you understand all the prepayment options by checking with your lender. Don’t forget to read about the prepayment penalties on the mortgage contract too. Check out how much mortgage you can afford.